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The importance of knowing the lifetime value of a customer

It’s amazing that so many businesses fail to understand the concept of the lifetime value of a customer and how the experience people have with a business is what really drives value at the end of the day.

Here’s a story from Christine Clifford Beckwith (co-author with Harry Beckwith, of You, Inc. The Art of Selling Yourself) that underlies what I’m talking about.

In 1994 Christine discovered that she had breast cancer which was successfully operated so it’s a good news story.  However, when she returned home from hospital with the “all clear” she received a letter from the hotel chain she regularly used notifying her how lucky she was to have achieved a special frequent guest status that carried some nice rewards.

Because she was advised by her physician to take it easy while  receiving post-operation treatments she realized she would not be traveling as much in the next 12 months so she wrote the hotel explaining that she was recovering from a cancer operation and requested that her benefits be deferred for 12 months.  Here’s the hotel’s form letter she received:

We received your request to extend your frequent guest benefits. While we regret what has happened to you, we also realize that things do happen, and we are unable to defer your benefits.  But we hope to see you soon.

The letter may as well have said: “we actually don’t give a damn about you or your illness, our frequent guest program is simply designed to give the appearance that we care about our guests and to keep up with the “value” offerings of other hotels.  Whenever possible we make it hard for our guests to actually benefit from the program.”

Now, in contrast, Christine also wrote to Northwest Airlines and requested a 12 month deferral of her loyalty benefits.  Here is the handwritten letter she received back:

How can we thank you for being one of our best customers? We are happy to defer your benefits for a year. In addition, we have enclosed four complimentary airline tickets to take you and your family away from the cold Minnesota winter and give you a break from your treatments. Thank you Christine, for your business. We will miss you this year.

Sincerely,

John Dasburg, CEO

Both of these organizations have records of her loyalty to them (share of wallet some people say) so both of them know what she is “worth” to them over a lifetime.  She is a public speaker and author who travels a lot, she is not a once-a-year holiday traveler who stays with relatives.  But even if she did fall into the latter category, she still talks to people about her experience.  She now only travels on another airline if Northwest does not service her destination and she never stays that the hotel chain that she was once a “loyal guest” of!  This is an example of the cost of the lost opportunity that I often talk about – it’s not only lost, it’s invisible because our transaction-based accounting system never reveals details of transactions that did not occur.

If the hotel have bothered to give the concept of lifetime value some attention and modified its systems to reflect the true value of a customer it would today be the beneficiary of Christine’s loyalty and not the victim of her negative testimonial.

  1. August 10th, 2010 at 13:43 | #1

    Awesome Post Ric!

    I repeatedly explain to new entrepreneurs this concept.

    The investment in “the lifetime value of a customer” vs the cost of loosing one..

    Thank You!

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